from the aren't-things-bad-enough? dept

It would be something of an understatement to say that people have strong opinions about patents. But as Techdirt has reported, there's a growing consensus that software patents in particular aren't working -- James Bessen and Michael J. Meurer have written an entire book, "Patent Failure", about how bad things are there, and why it's happening in this area rather than elsewhere.

One of the key problems is that software patents are essentially patents on mathematical algorithms -- sets of instructions for carrying out a calculation. Since it has long been a principle that you can't patent mathematical formulae or laws of nature, there is a tension there: if software is just mathematics, why should you be able to patent it at all? New Scientist points to an interesting article in the April 2013 issue of Notices of the American Mathematical Society, in which David A. Edwards
proposes a radical way of solving that conundrum (pdf):

At present, only those things which are made by man are patentable. Thus, the courts have allowed new forms of bacteria which have been engineered to have useful properties using recombinant DNA techniques to be patented but would not allow such a bacterium to be patented if it were naturally occurring even if it were newly discovered. This is the basis for the nonpatentability of computer programs. They are algorithms, which are essentially mathematical formulas, which -- as everyone knows -- are "eternal" and hence discovered by man and not created by him. This argument which, to say the least, is philosophically controversial, leads to our present unfortunate policy. From an economic point of view, there is no rationale for distinguishing between discovery and invention, and we would advocate dropping entirely any subject matter restrictions whatsoever on what can be patented. One should be able to patent anything not previously known to man.

In particular, he believes it should be possible to patent mathematics, and hence software.

One of his arguments is that this would spur people to make more discoveries. But that presupposes mathematicians aren't trying to do that now for glory, peer esteem and tenure, but there's no evidence to suggest that. The same argument is sometimes made in support of software patents -- that they stimulate the production of more software. But that overlooks the fact that the computer industry thrived for decades before the introduction of software patents, and that companies like Microsoft grew into hugely profitable enterprises without them.

In a memo to his senior executives, Bill Gates wrote, "If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today." Mr. Gates worried that "some large company will patent some obvious thing" and use the patent to "take as much of our profits as they want."

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years -- an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

That's bad enough for huge companies with deep pockets; it would be even worse for universities on tight budgets which might suddenly find themselves sued for using mathematical formulae without permission -- a ludicrous situation. Edwards seems to be aware that this is a problem, and tries to address it as follows:

Since patents only give control over the commercial applications of his or her discovery or invention to the patentee, granting patents on mathematical formulas, laws of nature, and natural phenomena would have no negative side effects on pure science.

In 2002, the Court of Appeals for the Federal Circuit dramatically limited the scope of the research exemption in Madey v. Duke University, 307 F.3d 1351, 1362 (Fed. Cir. 2002). The court did not reject the defense, but left only a "very narrow and strictly limited experimental use defense" for "amusement, to satisfy idle curiosity, or for strictly philosophical inquiry." The court also precludes the defense where, regardless of profit motive, the research was done "in furtherance of the alleged infringer's legitimate business." In the case of a research university like Duke University, the court held that the alleged use was in furtherance of its legitimate business, and thus the defense was inapplicable.

Clearly, there is huge scope for inventive lawyers (mathematical trolls?) to bring lawsuits against academics here, which would inevitably have a chilling effect on "pure science". Far from helping resolve the problems we have today with software patents, extending patentability to the mathematics that underlies programming would simply spread the misery wider, and make the lawyers richer.

from the take-it-to-the-bank dept

There's been plenty of talk about HBO and its ongoing refusal to offer a standalone internet offering for its content (unless you happen to live in the lovely Nordic region). A few months ago, this discussion took something of a viral turn with the website TakeMyMoneyHBO.com, which tried to calculate how much people would pay for standalone internet/mobile access to HBO content -- which suggested people would be willing to pay an average of about $12 per month. Now, we can all take online internet surveys with a pretty big grain of salt, but there clearly is a lot of interest in people getting such a service. The straight math says that at $12, it would be a good deal for HBO, which is rumored to actually get about $7 or $8 per subscriber via cable and satellite. But... as Ryan Lawler at TechCrunch wrote at the time, it's not that straightforward, and you can show how the math doesn't quite add up:

More importantly, it wouldn’t include the cost of sales, marketing, and support — and this is where HBO would really get screwed. Going direct to online customers by pitching HBO GO over-the-top would mean losing the support of its cable, satellite, and IPTV distributors. And since the Comcasts and the Time Warner Cables of the world are the top marketing channel for premium networks like HBO, it would be nearly impossible for HBO to make up for the loss of the cable provider’s marketing team or promotions.

Think about it: Every time someone signs up for cable or satellite service, one of the inevitable perks is a free six- or 12-month subscription to HBO. And those free subscriptions are rarely, if ever, cancelled once the trial period ends.

Lawler insists the math doesn't add up because without that marketing push, the number of subscribers would be much lower. HBO claimed that Lawler's math was right. And it may be. For now. But that's really dangerous thinking.

We've pointed out before that it's quite tempting for legacy players to think that they can wait out disruptive innovation. They talk about how the new products and services aren't good enough or don't make enough money to bother getting into that space. Often they'll directly talk about how the new services don't make the same amount of revenue as the old ones (or they'll make some crack about "dollars into dimes.") And, of course, they insist that when the money is there they'll make the switch. But, if you understand anything about the history of disruptive innovation, you know that if you wait until that point, you're already behind. Someone else has already taken over that market, and your "switch" is often seen as way too little, way too late (not to mention that it's often accompanied by massive bungling, as the slow entrance also means not really understanding enough about how that market works, while all your competitors spent all that time perfecting their solutions).

MG Siegler has a great post talking about this very concept as it relates to HBO, responding to Lawler (again) and his recent interview of an HBO exec during a panel at TechCrunch Disrupt. Once again, HBO insisted that Lawler was right and that "the math didn't make sense." But Siegler points out, correctly, that innovation beats math every single time. Siegler basically highlights the key point of Clayton Christensen's Innovator's Dilemma: it's really really tough for legacy players to eat their own cash cows and bet on something new. He points to another excellent article, by Farhad Manjoo at Slate, about how Apple actually does this really well, specifically how it totally cannibalized its cash-cow iPods with the iPhone:

Put it all together and you get remarkable story about a device that, under the normal rules of business, should not have been invented. Given the popularity of the iPod and its centrality to Apple’s bottom line, Apple should have been the last company on the planet to try to build something whose explicit purpose was to kill music players. Yet Apple’s inner circle knew that one day, a phone maker would solve the interface problem, creating a universal device that could make calls, play music and videos, and do everything else, too—a device that would eat the iPod’s lunch. Apple’s only chance at staving off that future was to invent the iPod killer itself. More than this simple business calculation, though, Apple’s brass saw the phone as an opportunity for real innovation.

That, in a nuthsell, is what most companies fail to do. It's why Clayton Christensen's book sells so well, even though very, very few companies have any idea how to do what Apple did and "eat its own." But the point is there. If you focus on "the math," you're going to miss the market and be way, way too late. Back to Siegler:

Moore's statement about HBO is correct. The math is not in favor of selling HBO access directly to consumers. But if we're just thinking about this from a pure product perspective, I don’t think anyone would disagree that this is what we all want. HBO is choosing not to build the service we will love, they're choosing the short-term money. The safe bet. The math.

But if they don’t diverge from this path, it will lead to their demise. Innovation always beats math, eventually. That, you can take to the bank.

He's right. And the more you look at the economics of innovation, the easier it is to understand why innovation always beats math. It's because "the math" that people do is of a static world, for the most part. They use past performance and metrics built on a different market. They don't understand how quickly a new market grows, and how much larger its overall potential is. And that's because we have difficulty in mentally dealing with non-zero sum markets, preferring to think that it's a one-for-one switch. But, it's not. Innovation expands markets in new and unexpected ways, often quite rapidly (though also, deceptively slowly at first, because the growth is often in a tangential market that people don't even recognize).

So they come up with spreadsheets and "models" that try to predict when the math says it's time to switch. And all of that time they're not innovating. But since the disruption is brewing in a much faster manner, and in a different spot than they really think it is, the time to switch is usually as soon as you realize the innovation is happening, not when the spreadsheet tells you to. It's not just about choosing "the safe bet" vs "the service we love." It's about how disruptive innovation guarantees that those who don't build for the markets of tomorrow, don't really have much of a market tomorrow.